Sometimes it's the quiet bull that can turn out to be the most dangerous.
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While the world was worried about COVID-19 lockdowns and oil demand destruction behind the scenes, we have had a quiet oil bull market. With recent developments globally, the days of low oil and gas prices may soon come to an end.
Oil Hovers at $45 per barrel level
It has been quite a comeback since an OPEC-Plus Russia production war drove oil prices below zero earlier this year. Now with crude oil prices hovering around $45.00 a barrel, there are increasing, certain factions in the market that are betting prices could move substantially higher while others are positioning for a potential oil price crash and they are now starting to run for cover.
Hedge Funds Hoard Oil
Fund managers held a net long position equivalent to 617 million barrels on November 24, the most bullish since August 25, and in the 72nd percentile for all weeks since the start of 2013.
Hedge fund managers bought the equivalent of 78 million barrels of petroleum in the six most important petroleum futures and options contracts, including different crude oil grades as well as gasoline, diesel, and jet fuel. Fund purchases in the last three weeks totaled 260 million barrels, according to position records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.
Even though we have seen weak demand, global oil inventories have tightened, in part due to the historic OPEC-Plus production cuts. The combination of spurned oil producers flooding the market with crude during the most significant drop in global oil demand in history has created an unbelievable flood of oil.
Amazingly, the biggest oil glut in history could be gone because of plunging U.S. oil production and a demand rebound in Asia. It is expected that supply will fall back to the five-year average by the middle of next year. With a COVID-19 vaccine getting approved in Europe and expectations that approvals in the U.S. will follow as soon as this year, we could see this quiet oil bull market turnaround and begin to charge.
Perhaps the most significant risk to oil in the short term is a breakdown in the historic OPEC-Plus Russia accord. If OPEC hammers out a deal and it is widely expected that they will, the reality is that oil demand will see a post-pandemic rise and potentially cause a very tight market in the second half of the year 2021.
This is critical because significant players in the market know that the global crude oil market is unprepared for a sharp recovery in oil demand with oil producers and refiners significantly thinned out.
Are U.S. oil producers strong enough to handle rebound?
We have seen oil wells shut down and refineries close, and a rash of over 40 bankruptcies in the shale oil space, the most since 2016. Now oil producers in the U.S. will face a much more stringent regulatory environment in a potential Joe Biden administration that will assuredly restrict oil production, setting the stage for what could be a monster oil price rally.
The world has looked to the U.S. in the past to add oil production to meet any uptick in global oil demand. Now, with the U.S. shale patch on its knees and the government's hands around their throats, it is unlikely that the U.S. energy producer will be able to rise to the occasion.
So big money is sensing a new day in the global oil markets, and investors better be prepared for what could be a new oil market in the New Year.
Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at email@example.com.